Tax changes may leave 18 million families worse off next year

Families will be worse off unless the Chancellor extends the tax help. Photo: PA

Eighteen million families will be worse off by an average of £3 a week in the run-up to the next general election unless Alistair Darling finds more than £3bn a year to extend one-off help to households this spring, Britain's leading tax experts said today.

The Institute for Fiscal Studies said the chancellor faced a choice between adding to the goverment's mounting budgetary problems or alienating more than four-fifths of the 21.3 million families better off as a result of higher tax allowances and more generous winter fuel payments.

Robert Chote, the IFS director, said: "By announcing a big one-off increase in the personal tax allowance, Alistair Darling has not only created millions of winners this year: he has created millions of potential losers next year.

"On the evidence of its recent decisions, the government may well be afraid to take their gains away. If public sector borrowing ends up permanently higher as a result, it will further undermine the credibility of the government's management of the public finances and increase the probability of future tax increases or spending cuts, perhaps soon after the next general election."

Chote warned that it would cost £2.7bn a year to make higher income tax allowances permanent and a further £575m a year for winter fuel payments, with the risk that the government would break its own fiscal rule of keeping national debt below 40% at a time when a slowing economy was affecting tax revenues.

A Treasury spokesman hinted last night that the one-off help to most taxpayers this year would not be repeated and that Darling would target assistance at the lowest paid next year through tax credits. "The increase in the personal allowance will mean that 22 million people will gain an additional £120 this year. And we are providing support at a time when families are facing additional costs.

"As the chancellor said in his statement to the House of Commons, for future years our aim is to continue the same level of support for those on lower incomes. We will set out our plans for future years in the Pre-Budget Report along with our fiscal projections, in line with the requirements of the Code for Fiscal Stability."

The shadow chancellor, George Osborne, said the IFS had provided evidence of "Gordon Brown's compensation con" on the 10p tax rate. "His cynical manoeuvre to save his own political skin will leave 18 million people facing a tax rise next year. This is what happens when short term politics gets in the way of the long term interests of the country."

Speaking to the annual CBI dinner last night, Darling sought to solve one of the government's other tax problems - making it clear that he was alive to the threats of business moving out of Britain.

He said: "A few years ago one of our airlines used to say 'we never forget you have a choice'. Today, governments should remember that. Business does have a choice. Business is increasingly mobile. Tax rates have to be globally competitive. I am determined that British business will not be the fiscal fall guy. Business is the lynchpin of the British economy. Business creates jobs, wealth and generates growth. And government must ensure the right framework within which business can prosper. And tax is an essential part of that framework."

He added: "I want you to know that I am listening to you, and even though there will be times when we do not agree, it does not mean that I have not heard what you have to say."